Tuesday, July 1, 2014

Minimum Wage, Maximum Stupidity

The minimum wage should be the easiest issue to understand for the economically savvy. If the government arbitrarily sets a floor for wages above that set by the market, jobs will be lost. Even the Congressional Budget Office admits that 500,000 jobs would be lost with a $10.10 federal minimum wage. Who knows how high the real number would be?

Yet here we go again with the “Raise the minimum wage” talk at a time when unemployment is still devastating much of the country. The number of Americans jobless for 27 weeks or more is still 3.37 million. And while that’s only half the 6.8 million that were long term unemployed in 2010, most of the other half didn’t find work. Four fifths of them just gave up.

So, good economics and better sense would say, “make employment cheaper.” More of anything is demanded if the price goes down. That would mean lowering the minimum wage and undoing a number of cumbersome employment regulations that drive up the cost of jobs.

But then as H.L. Mencken reminded us years ago, “Nobody ever went broke underestimating the intelligence of the American public.” Which means the illogical case made by Republican multimillionaire businessman Ron Unz is being taken seriously.

We Don’t Want No Stinkin’ Entry Level Jobs

Unz says the minimum should be $12 and recognizes that 90% of the resistance is that it would kill jobs. So what’s his answer to that silver bullet to his argument? America doesn’t want those low paying jobs anyway. In his words, “Critics of a rise in the minimum wage argue that jobs would be destroyed, and in some cases they are probably correct. But many of those threatened jobs are exactly the ones that should have no place in an affluent, developed society like the United States, which should not attempt to compete with Mexico or India in low wage industries.”

He doesn’t think much of fast food jobs either. But he knows that employment can’t be shipped overseas, so Mr. Unz’s plan for those jobs is as follows:

So long as federal law requires all competing businesses to raise wages in unison, much of this cost could be covered by a small one time rise in prices. Since the working poor would see their annual incomes rise by 30 or 40 percent, they could easily afford to pay an extra dime for a McDonald’s hamburger, while such higher prices would be completely negligible to America’s more affluent elements.

The Number of Jobs Isn’t Fixed

He believes that if all jobs pay well enough, legal applicants will apply and take all the jobs. This is where Unz crosses paths with David Brat, the economics professor who recently unseated House Majority Leader Eric Cantor.

Brat claims to be a free-market sympathizer and says plenty of good things. However, in his stump speeches and interviews, Brat says early and often, “An open border is both a national security threat and an economic threat that our country cannot ignore. … Adding millions of workers to the labor market will force wages to fall and jobs to be lost.”

That would make sense if there were a fixed number of jobs, but that’s not the case. An economics professor should know that humans have unlimited wants and limited means, which, as Nicholas Freiling explains in The Freeman, “renders the amount of needed labor virtually endless—constrained only by the economy’s productive capacity (which, coincidentally, only grows as the supply of labor increases).”

An influx of illegal immigrants may or may not drive down wages, but even if it does, that’s a good thing. Low wages allow employers to invest in other things. More efficient production lowers costs for everyone, producers and consumers, allowing for capital creation. In the long run, it is capital investment that creates jobs.

Employers Bid for Labor Like Anything Else

Mr. Unz claims that low-wage employers are being subsidized by the welfare state. “It’s a classic case of where businesses manage to privatize the benefits of their workers—they get the work—and socialize the costs. They’ve shifted the costs over to the taxpayer and the government,” writes Unz.

It makes one wonder how the businessman made millions in the first place. Wage rates aren’t determined by what the employee’s expenses are. “Labor is a scarce factor of production,” wrote economist Ludwig von Mises. “As such it is sold and bought on the market. The price paid for labor is included in the price allowed for the product or the services if the performer of the work is the seller of the product or the services.”

Mises explained that a general rate of wages does not exist. “Labor is very different in quality,” Mises wrote, “and each kind of labor renders specific services. each is appraised as a complementary factor for turning out definite consumers’ goods and services.”

Not every job contributes $12 an hour in production benefits toward a finished good or service. And many unskilled laborers can’t generate $12 an hour worth of output. The Congress that created the minimum wage knew this and carved out the 14(c) permit provision in the Fair Labor Standards Act of 1938, allowing an exemption from minimum wage requirements for businesses hiring the handicapped.

That Congress included in the act this language:

The Secretary, to the extent necessary to prevent curtailment of opportunities for employment, shall by regulation or order provide for the employment, under special certificates, of individuals ... whose earning or productive capacity is impaired by age, physical or mental deficiency, or injury, at wages which are lower than the minimum wage.

Entrepreneurs must purchase all factors of production at the lowest prices possible. No offense to labor—that’s what customers demand. All cuts in wages pass through to customers. If a business pays more than the market wage rate, the business “would be soon removed from his entrepreneurial position.” Pay less than the market, and employees leave to work somewhere else.

Who Picks Up The Tab?

First, Unz says, “American businesses can certainly afford to provide better pay given that corporate profits have reached an all-time high while wages have fallen to their lowest share of national GDP in history.” So, instead of taxpayers supporting the poor, Unz wants business to pay. No, wait: later he writes that consumers will support the poor by paying higher prices.

“McDonald’s and fast food places would probably have to raise their prices by 8 or 9 percent, something like that. Agricultural products that are American-grown would go up by less than 2 percent on the grocery shelves. And those sorts of price increases are so small that they would be almost unnoticed in most cases by the consumer.” Walmart would cover a $12 minimum wage with a one time price increase of 1.1%, he says, with the average Walmart shopper paying just an extra $12.50 a year. So it’s consumers—who are also taxpayers—who get to be their brother’s keeper either which way with Unz’s plan.

Walmart Must Be Offering Enough

Fortune magazine writer Stephen Gandel appeared on Morning Joe this week, making the case that Walmart should give its employees a 50% raise (his article in Fortune on the subject appeared last November). According to him, the company is misallocating capital by not paying higher wages. He says investors are not giving the company credit for the lower pay in the stock price, so they should just do the right thing and pay their employees more.

But Walmart does pay more when it has to compete for employees. In oil rich Williston, North Dakota, the retail giant is offering to pay entry level workers as much as $17.40 per hour to attract employees.
Walmart isn’t alone. McDonald’s is paying $300 signing bonuses to attract workers. The night shift at gas stations in Williston pays $14 an hour.

By the way, whatever Walmart is paying, it must be enough, because it has plenty of applicants to choose from. In 2005, 11,000 people in the Bay Area applied for 400 positions at a new Oakland store. Three years later near Chicago, 25,000 people applied for 325 positions at a new store.

Last year a new Walmart opened in the DC area. Again, the response was overwhelming. Debbie Thomas told the Washington Post, “It’s hard to live in this city on $7.45 or $8.25 an hour. I’ve lived here all my life, and I want to stay here. In the end, I’m just glad Walmart’s here. I might get a job.”

Throughout history, people have had to relocate to find work. Today is no different.

In the long run, as the minimum wage increases, capital will be invested to replace labor. We’ve seen it for years. Machines don’t call in sick, sue for harassment, require health insurance, or show up late. Now patrons pour their own drinks. Shoppers scan their own groceries and pump their own gas. Soon we’ll be ordering from electronic tablets at our tables in sit down restaurants to cut down on wait staff, and the cooks will be replaced by automated burger makers.

Unz may well believe what he proposes would be doing good; however, it means kids and the unskilled go unemployed and in the end, are unemployable.

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